SBI sells 3.9% stake in life insurance arm for Rs 1,794 cr

It was largely known that the State Bank of India (SBI) was selling some stake in its life insurance subsidiary. But, the deal for sale of 3.9% stake in this business for Rs 1,794 crore, announced Friday after market hours, has surprised many.

This deal values SBI Life Insurance Company (SBI Life) at Rs 46,000 crore, making it the most valued private life insurance firm, pending the HDFC Life-Max Life merger. The latest valuation is also much ahead of analysts’ recently revised valuation estimates ranging Rs 32,000 to Rs 39,000 crore. These valuation estimates of SBI Life were revised upwards by analysts in August this year when the bank for the first time disclosed the embedded value (EV) of SBI Life.

Embedded value is calculated by adding the adjusted net asset value and the present value of future profits of a firm and is a measure of shareholders’ interest in the covered business of a company. The embedded value stood at Rs 12,999 crore as on 31 March, 2016, ahead of analysts’ estimates of Rs 8,000 to Rs 10,000 crore back then. This deal thus will boost SBI’s sum of the parts (SOTP) valuations for the second time this year.

Arundhati Bhattacharya, chairman, SBI, said, “The partnership with KKR and Temasek is a recognition of the efforts of SBI Life’s commitment to create a high quality institution which is a leader in the private Indian life insurance space. Moreover, this transaction values SBI Life at Rs 46,000 crore, reflecting significant value creation since its inception in 2001.”

The deal involves sale of 39 million shares at Rs 460 apiece. SBI said the bank’s Executive Committee of the Central Board has approved divestment of this stake, to private equity players. An investment vehicle affiliated with KKR-managed funds and an affiliate of Temasek, the Singapore-based Investment Company, will each purchase 19.5 million shares of SBI Life from SBI. Upon completion of the transaction, SBI will hold 70.1% stake in SBI Life while its joint venture partner, BNP Paribas Cardif, will continue to hold 26%.

Since the deal values the life insurance business at a premium of 18-44% compared to analysts’ estimates, it will lead to higher valuation of SBI Life in SBI's SOTP valuations. Consequently, it will lead to higher target price for SBI, say analysts.

“We believe SBI’s target price will go up by 5-6% post this deal announcement,” said Suresh Ganapathy, banking analyst at Macquarie Capital. The actual upgrades though will vary with each brokerage. Some analysts peg this increase in target price to three-four%. In either scenario, the SBI scrip should trade in the green in Monday’s session.

The deal values SBI life at 3.5 times its FY16 embedded value, which is expensive when compared to ICICI Prudential Life Insurance (the number one private life insurer), which trades at 3 times its FY16 embedded value. As per a HSBC report of last month, ICICI Prudential Life had an 11.3% market share and SBI Life at 9.7% as of March 2016, in RWRP (retail weighted received premium) terms.

The higher valuations can be partly justified by the fact that SBI Life, which is a close second to ICICI Prudential Life, has been growing its premiums at a faster clip compared to its peers.

“SBI Life is the fastest growing large private life insurer and the largest private life insurer by new business premium and number of policies sold. The company earned Rs 7,107 crore and Rs 4,640 crore of new business premium during FY2016 and H1FY17, respectively. The company had 22% private sector market share in terms of new business premium,” SBI said in a press release.

Analysts say, the value unlocking for SBI could continue going forward as well. “We see listing of SBI Life sometime next fiscal year and branch optimisation as potential positive catalysts for the SBI stock price,” said Santosh Singh, banking analyst at Haitong Securities. His target price of Rs 325 for SBI indicates upside potential of 22% from current levels. The SBI stock closed 2.4% higher at Rs 266 on the Bombay Stock Exchange on Friday.

Going forward, besides the news flow around SBI Life, the SBI stock could move in tandem with progress on the merger of its associate banks as well as the bank’s asset quality performance. Given its relatively superior show on both, market share expansion as well as asset quality, most analysts are positive on SBI stock.